Publication: Monitor Volume: 5 Issue: 229

Despite the International Monetary Fund’s decision to withhold yet again the second US$640 million tranche of its US$4.5 billion loan package to Russia, many analysts were of one mind this week that Russia can “survive,” given the current high prices for oil and the government’s enhanced revenue collections (Moscow Times, December 9). On the other hand, Russia remains unable to make principal and interest payments on its Soviet-era debt–the latest unmet deadline passed on December 2 (see the Monitor, December 8). Other indicators this week pointed to an equally gloomy long-term picture.

The value of the ruble, for instance, continues to drop. It slid this week to 27 to the U.S. dollar, and Russia’s Central Bank, which apparently has been trying in vain to prop up the currency, reported yesterday that its gold and hard currency reserves had fallen to US$11.5 billion on December 3–US$100 million less than the previous week. In addition, all signs suggest that the windfall created by the rise in oil prices is not being reinvested in the Russian economy. The Russian-European Center for Economic Policy reported this week that the flight of capital from Russia reached US$1.5 billion per month in the second quarter of this year, up US$800 million a month over the first quarter. The Center said that the increase in capital flight was partly due to the rise in oil prices and an increase in export profits, but also attributed the accelerating flight of capital to a lack of trust in Russia’s banking system. It is not that there is no money for investment: An economist with the Center, Peter Westin, estimated that the Russian population holds US$40 billion–US$50 billion, meaning there is more U.S. cash in Russia than in the United States. Russians, however, continue to refuse to invest their savings.

That so much cash remains stuffed under Russian mattresses is certainly a ringing indictment of Russia’s institutions–or lack thereof. Indeed, Aleksandr Zhukov, the head of the State Duma’s budget committee, noted this week that despite the current relatively favorable economic conditions, real incomes have dropped this year by 30 percent, while investment into the “real economy” remains nonexistent. Echoing the Russian-European Center for Economic Policy, Zhukov said that the main barrier to economic growth in Russia is the “universal lack of trust in the state” on the part of all the country’s economic actors. Zhukov said that the lack of real protection for private property was the reason for lack of investment and capital flight (Obshchaya gazeta, December 9).

Against this backdrop, Prime Minister Vladimir Putin laid out his government’s near-term plans in the area of economic policy this week. In an interview with the Paris newspaper Les Echos, Putin said that the “main efforts and available resources should be focused on concrete assignments and not spread out too thinly”–meaning, first of all, “the effective use of high technology of the military-industrial complex, where, fortunately, highly professional personnel have remained.” Pointing to a “steady” rise in industrial growth, Putin said that the government plans to keep the domestic goods market “relatively closed” while keeping it wide open for direct foreign investments. Putin also said that ten years of hard work were needed to reverse Russia’s economic backwardness, which was aggravated by the policy of “shock therapy” (Russian agencies, December 7). It is interesting to note that Putin’s prescriptions are strongly reminiscent of those which Yevgeny Primakov put forward when he was prime minister.